By Sara Watts and Iggy Pintado
How do you calculate a return on an outcome that is not quantifiable? I discussed this recently with Sara Watts, former Chief Financial Officer (CFO) at IBM and esteemed colleague for many years. This is her perspective.
I held a number of senior positions in finance including CFO, Financial Controller and Internal Audit Director at IBM for 10 years. I am currently a company director and chair the audit committee of the boards I serve on.
In my free time, I sing with a prestigious Australian choir – which means I must keep in tempo, count bars of music, and constantly subdivide note values. I also bushwalk with friends, and we always compare the number of steps our devices have recorded at the end of a day’s walk. In summary, pretty much everything I do can be measured and my life is full of numbers and numerical acronyms.
ROA, ROE, ROI, IRR, WACC, EPS, P/E are just some of the financial acronyms that are quantifiable measures. But what about Return on Outcome (ROO)?
How do I describe ‘outcome’? It’s the way things turn out.
Therefore, ROO could be interpreted as a return on or from the way things turn out. That’s very different from ROI which is a relative measure of the return on an investment, and usually requires a quantifiable - often cash or profit - return.
As a non-executive director (NED) I must consider ROI. After all, one of our key responsibilities is to make sure that we’re spending shareholder, government grant, or donated funds wisely. However, most NEDs also consider impact, outcome, value, and legacy even if it’s harder to quantify and measure.
Of course, that is not unique to the NED world. This concept is important enough that some governments have introduced outcomes-based budgeting. For example, both the NSW and Victorian governments in Australia have recently moved towards this. Departments and agencies are asked to submit budgets and make investment decisions based on how the use and expenditure of public resources will deliver outcomes for citizens. It is seen as a way to improve performance and promote transparency.
The concept of ROO appeals to me for two reasons. Firstly, it creates a way to give structure to a discussion that is often informal rather than formal and, secondly, because I see it as complementary to ROI. A discussion about ROO encourages a different conversation around the board table which in turn means deeper consideration of multiplier effects, linked benefits, and unintended consequences whether good or bad.
A discussion about ROO acknowledges that some returns we’re seeking are not easily quantified, can’t be measured, may have secondary and tertiary impacts, and reminds us that not every investment outcome can, nor should, be monetised.
I don’t know how to quantify the relief someone feels knowing that their aging parent is getting good care, or the benefit to a small and remote African community who received COVID-19 vaccinations. Nor have I yet worked out how to measure the economic benefit of a child learning English when their capacity to earn is still 10-15 years away.
Whether an organisation is listed on a securities exchange, privately owned, or a non-for-profit, their NEDs will be considering a range of outcomes alongside the more formal ROI measures.
As the conversation around the board table turns to the impact of the decision on shareholders, the likely reaction of investment analysts or clients, the impact on Environmental, Social, and (Corporate) Governance (ESG) credentials and other reputational factors, it may not be called a discussion about Return on Outcome, but it probably is.
